The law panel, in its report, says that HUFs are being used for tax
evasion. “The special status given to the entity of HUF was only for the purpose of taxation. Now, this status is being used for the evasion of tax
only,” it says.
It relies on the Direct Taxes Enquiry Committee Report of 1971 that said HUFs were being used for tax
In fact, a 1971 paper published in the Economic and Political Weekly titled “An Agenda for Tax
Base Reform” estimated revenue losses in 1958-59 to be Rs 1.47 billion and nearly Rs 3 billion that year.
In order to increase revenues to the Tax
Department, the Law Commission
recommends abolishing HUFs.
What are HUFs and how are they taxed?
HUF is the legal term given to a joint family in the Indian context and was given a distinct status in income tax
law as early as 1886. The Income Tax
Department website clarifies that a HUF is a ‘family which consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters'. The Income Tax
Act of 1995, under Section 2(31) includes HUF within the definition of ‘person’, that is an entity required to pay income tax.
According to experts, aside from being a separate tax
unit, a HUF is taxed in the same manner as individuals.
“There is no special exemption available to HUFs under tax
laws. However, since a HUF is regarded as a separate person (other than the individual Karta of the said HUF), any income earned by the HUF also gets taxed as per the normal income tax
slab rates available to an individual,” said Rishabh Shroff, partner at Cyril Amarchand Mangaldas, a law firm.
Amarpal Chadha, Tax
Partner & India Mobility Leader, EY India, said: “Any income offered towards tax
by a HUF would be eligible for the benefit of the basic exemption, lower slab rates, deductions under Chapter VI-A (of the Income Tax
Are HUFs guilty of tax evasion?
The Law Commission
certainly seems to think so. However, experts disagree.
“There is a difference between tax
evasion and tax
avoidance is legitimate, and tax
evasion is illegal. HUFs are not used for tax
evasion but for tax
avoidance/to save the tax
within the four corners of the law,” said Balwant Jain, a tax
and investment expert.
Amit Singhania, tax
partner, at Shardul Amarchand Mangaldas, said to the extent of using a different tax
slab, there could be tax
evasion. “However, the department can use other measures to counter that. Two years back, they imposed the General Anti-Avoidance Rules. If they think HUFs are being formed to get slab benefit, then HUFs can be disregarded under the GAAR regime,” he added.
Further, according to Shroff, there are checks and balances in the system.
Will the government and the Income Tax Department get more tax revenue if HUFs are abolished?
Although the Law Commission
claims that to be the case, experts say that there will be little or almost insignificant change in tax
revenues. “I don’t think there is going to be a significant increase in tax
revenue to the I-T department if HUFs are abolished. Moreover, I haven’t seen big business houses being incorporated as HUFs,” Singhania said.
Agreeing with this, Shroff said: “This will not affect business houses in any real way. Having said this, there will be a minor increase in the revenue collection from smaller taxpayers, as income by HUFs will then be regarded as earned by individual members of the family and they will have to pay tax
under higher slab rates for such income.”
In that case, should HUFs be done away with?
Largely, abolishing HUFs could create legal complexities, some experts said. “If the concept of HUF is abolished under the income-tax
law, the taxation of existing HUFs may become complex. The income of the HUF would have to be taxed in the hands of the individual,” Chadha said.
Shroff noted the emotional impact of the same.
Striking a different note, Jain said that implementing the Law Commission’s proposal would be difficult because of politics. “Since in this country everything moves with vote bank considerations and the Hindus constituting a significant proportion of voters, it is very difficult to implement the suggestion of law commission,” he said.